Digital banks and the transformation of Malaysia’s financial landscape
Author: Kim Leng Yeah, Sunway University
Malaysia’s push into digital banking is gathering pace. The central bank’s decision to issue up to five
digital bank licences in the first quarter of 2022 generated considerable interest. With the country’s
existing banks already deploying digital delivery channels and financial technology as a competitive
tool, the advent of new digital banks will further enliven the post-COVID-19 banking landscape.
The central bank’s digital banking thrust is a natural progression of the financial sector’s continuous
innovation and growth which has supported the country’s economic development. Following the
banking system’s recapitalisation and bad loans carve-out during the 1998 Asian financial crisis,
Malaysia’s financial institutions, structure and governance were improved significantly.
Guided by the Financial Sector Master Plan 2001–2010, the strengthened banking system enabled
the economy to withstand the turbulence of the global financial crisis with a relatively shallow
recession of just -1.5 per cent of GDP, compared to the -7.4 per cent decline during the Asian
financial crisis. The subsequent Financial Sector Blueprint (2011–2020) focussed on further
strengthening the sector’s resilience, efficiency and competitiveness. The financial sector was left
relatively unscathed by the COVID-19 pandemic-induced recession in 2020, enabling the central
bank to continue with its digital bank initiative.
Encouraging digital banking is consistent with the blueprint’s strategy to promote greater
competition in the financial sector by progressively liberalising delivery channels. The blueprint also
envisaged a regulatory environment more conducive to a thriving digital economy, in line with the
2019 Malaysia Digital Economy Blueprint. Indeed, the intention to issue new digital bank licenses
was first revealed alongside plans for the country’s digital future. The underlying principle is that the
new technologies will lead to efficiency gains and unleash new opportunities for firms to grow their
business and better meet customer needs.
In line with the blueprint’s strategy, the licensing framework for digital banks seeks to promote
innovations that will help meet the nation’s future economic needs. While the entry of up to five
digital banks in 2022 may intensify competition for existing financial institutions, the framework
targets players with innovative business models that can ‘offer banking products and services to
underserved or unserved markets wholly or almost wholly through digital or electronic means’. The
overlap in market segments between the new digital banks and existing financial institutions will
thus be limited, at least at first.
Larger banks that have invested heavily in IT infrastructure, electronic payment systems and digital
banking platforms will have less of a problem competing with the digital banks once the two market
segments coalesce. Some are even part of consortiums in the running for the new licences,
potentially giving them a share of the ‘underserved or unserved’ market segments.
The central bank has done a great deal to prepare the banking sector for digital disruption.
Recognising that financial technology could reshape the sector, the central bank promoted its
adoption in applications such as payments, financial inclusion, Islamic finance, consumer protection
and money services. It created a vibrant electronic payments ecosystem to catalyse technological
innovation, collaborated with industry players to establish digital platforms for financing small and
medium-sized enterprises and promoted the use of electronic know-your-customer processes. It
also introduced the Financial Technology Regulatory Sandbox in 2016 to serve as a platform for
deploying and testing new policies.
In addition to strengthening financial inclusiveness, digital banks could also boost efforts to narrow
the country’s digital divide between rural and urban strata and the less developed states in eastern
Peninsular Malaysia and the Bornean states of Sabah and Sarawak. Despite the high average internet
and mobile broadband penetration rates of 92 and 90 per cent respectively, rural populations lag
behind their urban peers by around 9.5 percentage points.
The measured pace at which the central bank is allowing the entry of digital banks is understandable
given the potential risks to financial stability. At a time when the COVID-19 pandemic is accelerating
the digital transformation of banking and financial services across the world, the arrival of digital
banks will further add to the dynamism of Malaysia’s financial sector. Further details on the
country’s digital roadmap, including the embrace of open banking and creation of the central bank
digital currency, will emerge when the Third Financial Sector Master Plan (2021–2030) is launched in
late 2021.
Kim Leng Yeah is Director of the Economic Studies Programme at the Jeffrey Cheah Institute on
Southeast Asia, Sunway University.
